Mining Industry Insight (Summer 2016)

This document focuses on a number of topics that pertain to the mining industry as a whole, including factors influencing oil and coal production, the top geographic area for mining, the outlook for metals and mining, and a brief summary of trends in used equipment values.

Hot Topics

OPEC Sees Oil Glut Shrinking: In its mid-June forecast, the Organization of the Petroleum Exporting Countries (OPEC) predicted that the world oil market will be more balanced in the second half of 2016 as shutdowns in Nigeria and Canada help to speed up the erosion of a supply glut. If OPEC keeps pumping oil at May’s rate, the group expects that supply will exceed demand by just 160,000 barrels per day (bpd) during the second half of the year. A surplus of 2.59 million bpd in the first quarter sent prices to a 12-year low of $27 a barrel. However, since that time oil has risen to nearly $50 a barrel as the shutdowns have curbed excess supply. OPEC believes these shutdowns are accelerating a tightening in the market, as lower prices finally take their toll on higher-cost supply outside the group. Despite the fact that supply and demand have more closely aligned, OPEC cautions that there is still a massive global supply overhang. Oil prices collapsed from $100 a barrel two years ago in a drop that deepened after OPEC refused to cut output, hoping lower prices would curb rival supply. With signs that strategy is working, at its June 2 meeting OPEC did not change its output policy. The price drop is hitting non-OPEC supply as companies have delayed or cancelled projects around the world. OPEC forecasts that supply from outside producers will decline by 740,000 bpd in 2016, led by the United States. OPEC supply had been climbing since the 2014 policy shift, reaching its highest level since April 2008, but output fell by 100,000 bpd in May led by the shutdown in Nigeria. As non-OPEC supply falls and seasonal demand rises, the demand for OPEC crude is expected to rise to an average of 32.52 million bpd in the second half of 2016. OPEC sticks by its forecast that world oil demand will rise by 1.20 million bpd this year.

U.S. Coal Production Drops to Lowest Level Since 1981: The last time coal production in the U.S. was this low, Donald Trump was just beginning to build his real estate empire, Ronald Reagan was sworn in as president, and Ordinary People won an Academy Award for best picture. According to the Energy Information Administration, only 173 million tons were produced in the first three months of 2016. The last time production feel that low was in 1981 when the country was in the midst of a major coal strike. Now, fault for the low coal production comes mostly from a lack of demand resulting from a mild winter that has severely crimped the need to burn the fossil fuel. Other factors contributing to the decline in production include challenging market conditions for coal producers and greater reliance upon less environmentally damaging fuel substitutes such as natural gas and renewables. In Texas, Michigan, Illinois, and Oklahoma, which together account for 40% of the coal market, demand for PRB coal fell to 19 million tons in the first quarter, compared to an average 37 million tons per quarter in 2015. In January, the amount of coal used for electricity generation in the U.S. sunk to a 45-year low. By comparison, electricity from natural gas, a substitute fuel for utilities, increased during the same time period, as shale gas production in the U.S. ramped up, causing prices to fall.

Along with low prices, the Obama administration’s focus on reducing emissions from coal-powered electricity plants has pushed a number of U.S. producers into bankruptcy protection, including Peabody Energy (NYSE:BTU), the world’s largest privately owned coal producer. More recently, Murray Energy Corporation, the country’s third largest coal producer, notified 4,400, or 80%, of its 5,300 employees of the potential for a mass workforce reduction in September. Shortly thereafter, the company stated that the WARN notices issued to employees were a precautionary measure and that no layoffs are expected. Just about one year ago Murray had about 8,400 employees. Ensuing bankruptcies and potential layoffs such as this have created a battleground in the upcoming presidential election, with the nominee for the Democrats, Hilary Clinton, and presumptive Republican nominee Donald Trump, both promising help for displaced coal miners. During a May speech Trump blasted the current government for over-regulating the industry, saying it needs to “get out of the way” of the industry. If elected Trump said he would “rescind Obama’s “job-destroying” executive actions, “save” the coal industry, revive the Keystone XL pipeline project and cancel the Paris climate accords.” Hilary Clinton has aimed her criticism at the coal companies for avoiding their responsibility to pay healthcare benefits for retirees during bankruptcy proceedings. Clinton also said she’ll spend more than $30 billion to revitalize communities dependent on coal production, as part of a broader agenda based on switching to clean energy. However, Clinton ran afoul of coal-country voters by saying earlier in a televised speech that she would put coal companies and miners out of business.

Australia Top Spot for Mining Investment: Australia is the world’s most attractive region for mining investment, according to an annual global survey of mining executives released today by the Fraser Institute, an independent, non-partisan Canadian policy think-tank. “Despite a global downturn of commodity prices, governments worldwide can offer competitive, transparent, and stable mining policies to encourage exploration and investment,” said Kenneth Green, Fraser Institute senior director of energy and natural resources and director of the Fraser Institute Survey of Mining Companies, 2015. The annual survey rates 109 jurisdictions around the world based on geologic attractiveness and the extent to which government policies encourage or deter exploration and investment. Western Australia ranks as the number one jurisdiction in the world for mining investment. In addition to being blessed with an abundance of mineral potential, miners give the jurisdiction’s government credit for having transparent mining policies, a strong legal system, clear regulations and a skilled labor force. In total, three Australian jurisdictions finished in the top 10 worldwide: Western Australia (1), Northern Territory (7) and South Australia (10). Canada and the United States also fare prominently in this year’s survey. Saskatchewan is the top-ranked Canadian province — second overall — while Nevada is the top U.S. state placing third. Five out of the top 10 worldwide jurisdictions are, in fact, in North America. Two European jurisdictions complete the top 10 list — Ireland (4) and Finland (5). Europe’s median investment attractiveness score experienced a notable increase. As in previous years, a number of European countries continue to be praised for their attractive policy environments, which include clear licensing policies and efficient permitting processes. Chile, which is ranked 11th overall, remains the most attractive jurisdiction for mining investment in Latin America and the Caribbean Basin. The African continent, as a whole, continues to better its performance since 2012, and now ranks ahead of Oceania, Asia, Latin America, the Caribbean and Argentina for its investment attractiveness. The top 10 worldwide investment attractiveness rankings include: 1. Western Australia, 2. Saskatchewan 3. Nevada, 4. Ireland, 5. Finland, 6. Alaska, 7. Northern Territory, 8. Quebec, 9. Utah and 10. South Australia.

2016 Outlook for Metals, Mining Darkens: Early in June 2016, the World Bank downgraded its 2016 global growth forecast to 2.4% from the already sluggish 2.9% pace projected in January. According to their latest update, emerging market and developing economies that rely on exporting have struggled to adapt to lower prices for oil and other key commodities, and this accounts for half of the downward revision. Growth in these economies is projected to advance at a meagre 0.4% pace this year, a sharp downward revision of the 1.2% projected last January. Although metal prices have rallied from January lows on expectations of stronger demand, ongoing supply rebalancing from production cuts, and lower investment in new capacity, markets remain oversupplied. According to the latest update by the World Bank, stockpiles remain elevated and prospects are for continued increases in capacity resulting from earlier large investments, notably for iron ore (Australia), copper (Peru) and aluminum (China). The prospects for zinc are brighter thanks to the closure of large zinc mines in 2015 in Australia and Ireland. On the whole, metal prices are projected to decline 15% in 2016 and to rise moderately in the medium term as the expansion of capacity slows, but the timing will vary by individual metals. The World Bank has lowered its outlook for metal and energy prices from its January predictions and now sees a slower recovery for metals and mining.

Trends in Used Equipment Values

While the construction market continues to progress, a positive outlook for the future of mining appears to be further out. According to the German Engineering Federation (the Federation), mining equipment sales are still falling. However, the Federation is optimistic that 2017 will bring a return to profitable equipment sales in Germany. On a global scale, analysts from the Federation expect things to improve during the latter half of 2016 and in 2017. The anticipated improvement is attributable in part to the influence of bauma, the world’s largest construction industry trade fair which takes place in Germany. The trade fair was recently held in April and takes place every three years. History shows that customers delay purchasing decisions until bauma when new equipment is launched and can be previewed by potential buyers. Data provided by the Federation shows that the rate at which mining equipment sales are dropping is slowing. In 2015, Germany saw a drop of only 3% in machinery production compared to 29% in the prior year. In the short term, the mining sector can remain cautiously optimistic about the future, as an increase in customer inquiries is being observed, which indicates customers are starting to look at buying new equipment. The Federation also expects that demand for metallic and raw mineral materials extracted in hard-rock mining will increase substantially as global production of alternative energies continues to expand. Another reason for this cautious optimism is the need for raw material producers to reduce costs. In order to achieve profits in the current low-price environment, they have to increase the efficiency of their machinery and plant, and thereby reduce their costs. The global trend towards increasing safety also benefits the mining equipment sector as many countries are busy making their coal mines safer through the use of advanced equipment. While the above factors play out in the market for new equipment, reductions in capital expenditures and ongoing efforts to curtail operating costs may continue to benefit the market for used mining equipment.